3rd January 2012   1
2012 IS THE SIXTH CONSECUTIVE YEAR THAT   WE COMMUNICATE OUR PLANS FOR      THE FORTHCOMING PERIOD                        ...
TODAY’S STATEMENT WILL BE IN 7 PARTS…1. Background and Introduction to the Road Map2. Key Macroeconomic Developments in 20...
1. BACKGROUND AND INTRODUCTION        TO THE ROAD MAP           A quiet peek into           history is always useful…     ...
SRI LANKA INTRODUCED OPEN ECONOMIC POLICIES FROM 1978… • Adoption of more market oriented policies promoting greater priva...
FURTHER RELAXATION OF POLICY MEASURES TOOK PLACEFROM 1990 TO 2005…• Extensive privatisation programme• Medium term budget ...
FROM 2006 ONWARDS, POLICY MEASURES WERE BASEDON THE MAHINDA CHINTANA…•   Transforming the country into an             •   ...
MAHINDA CHINTANA: VISION FOR THE FUTURE ENVISAGES THETRANSFORMATION OF SRI LANKA INTO AN ECONOMIC HUB IN SOUTHASIA AND DOU...
2. KEY MACROECONOMIC DEVELOPMENTS IN 2011Since the start of the global crisis in 2007, each year seems tobe more challengi...
THE PROTRACTED EUROZONE DEBT CRISIS AND LOSS OFCONFIDENCE HAS SLOWED THE GLOBAL RECOVERY…                                 ...
THE BELIEF THAT THE WORLD ECONOMIC GROWTH WOULDCONTINUE TO BE SLUGGISH IN 2012 IS GAINING GROUND…• The Central Bank’s own ...
NEVERTHELESS, ASIA’S IMPORTANCE IN THEGLOBAL ECONOMY HAS BEEN STEADILY RISING…                              Asia’s Share o...
IN THIS SCENARIO, THE SRI LANKAN ECONOMY HAS ACHIEVEDA HIGH GROWTH PATH…• The growth in 2011 is estimated at 8.3%        •...
THE SERVICES SECTOR CONTRIBUTION TO THE GROWTH WASSIGNIFICANT…                                                            ...
THE INDUSTRY SECTOR RECORDED THE HIGHEST SECTORALGROWTH…Industry sector estimated to grow by 10.1% in 2011                ...
THE AGRICULTURE SECTOR GROWTH WAS AFFECTED, BUTRECOVERED…Agriculture sector is estimated to grow by 2.0% in 2011          ...
UNEMPLOYMENT DECLINED WHILE LABOUR PRODUCTIVITY             INCREASED….                                                Une...
AT THE SAME TIME, POVERTY ALLEVIATION HAS BEEN     GIVEN SERIOUS ATTENTION...                         Poverty Headcount In...
THE EXTERNAL SECTOR DISPLAYED STRONG PERFORMANCEAMIDST THE SLOW PACE RECOVERY IN THE WORLD ECONOMY…• External trade in 201...
A SIGNIFICANT INCREASE IN EXPORT EARNINGS WAS RECORDED    DESPITE SLOWER GROWTH IN TRADITIONAL MARKETS…•              Expo...
AT THE SAME TIME, IMPORTS EXPANDED AT AN EVEN FASTERPACE…•   For the first 10 months of 2011, imports                     ...
IN PARTICULAR, PETROLEUM, MOTOR VEHICLES AND GOLDIMPORTS SURGED IN 2011…                                              Impo...
TOURISM ENTERED A HIGH GROWTH ERA…•   Tourist arrivals poised to record 850,000                                           ...
SEVERAL ADDITIONS TO TOURISM INDUSTRY ARE EXPECTED TO    TAKE THE INDUSTRY TO THE NEXT LEVEL….•   More International Hotel...
WORKERS’ REMITTANCES EMERGED AS THE FOREMOST FOREIGN          EXCHANGE EARNER INDICATING A MAJOR SHIFT IN SRI LANKA’S     ...
WORKERS’ REMITTANCES AND INFLOWS TO THE SERVICESACCOUNT SERVED TO CONTAIN THE WIDENED TRADE DEFICIT… • Deficit in trade ac...
FOREIGN CAPITAL INFLOWS CONTINUED TO BE SIGNIFICANT& PICKED UP MOMENTUM…• Fourth international sovereign bond in July 2011...
THE FOURTH SOVEREIGN BOND ISSUE CLEARLY RESONATED     WITH INVESTORS…•       The 10 year bond of US$ 1 bn was oversubscrib...
AS A RESULT, GROSS OFFICIAL RESERVES REMAINED ATCOMFORTABLE LEVELS, ALTHOUGH LOWER THAN AT THEBEGINNING OF THE YEAR…• Gros...
DURING 2011, INTERNATIONAL RESERVES WERE ACCUMULATEDTO HISTORICALLY HIGH LEVELS, AND ALLOWED TO DECLINETOWARDS THE END OF ...
THE CENTRAL BANK HAS BEEN CONFIDENT OF ITS STANCE INTHE SECOND HALF OF 2011, SINCE SUBSTANTIAL FOREIGNEXCHANGE INFLOWS ARE...
AS A RESULT OF THE CENTRAL BANK POLICIES, THE EXCHANGE                         RATE IN 2011 DID NOT SUFFER UNNECESSARY VOL...
AT THE SAME TIME, THE FISCAL CONSOLIDATION EFFORT CONTINUED, WHILE MAINTAINING PUBLIC INVESTMENT AT HIGH LEVELS…          ...
LEADING TO THE DEBT TO GDP RATIO ESTIMATED TO FALL TO 78% IN 2011, WHILE IN MANY COUNTRIES THIS RATIO HAS SOARED…         ...
THE RISK INDICATORS OF SRI LANKAN PUBLIC DEBT IMPROVED,IN A TIME WHERE GLOBAL RISK HAS BEEN RISING…                       ...
THE CONTINUOUS UPGRADE IN INFRASTRUCTURE GREATLYENHANCED THE COUNTRY’S PRODUCTIVE CAPACITY…– Road development projects    ...
ON THE BACK OF SUCH INFRASTRUCTURE UPGRADE, PRIVATE    SECTOR INVESTMENTS HAVE BEEN ON THE RISE…•   New terminal at Colomb...
THE CENTRAL BANK’S MONETARY POLICY STANCE IN 2011, WAS CAUTIOUS AND CONSISTENT, & DELIVERED STABILITY…                    ...
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SRI LANKA STATUS

  1. 1. 3rd January 2012 1
  2. 2. 2012 IS THE SIXTH CONSECUTIVE YEAR THAT WE COMMUNICATE OUR PLANS FOR THE FORTHCOMING PERIOD 2
  3. 3. TODAY’S STATEMENT WILL BE IN 7 PARTS…1. Background and Introduction to the Road Map2. Key Macroeconomic Developments in 20113. Developments in the Financial System in 20114. Macroeconomic Outlook and Proposed Monetary Policy Strategy for 2012 and Beyond5. Proposed Strategies for Financial System Stability for 2012 and Beyond6. Policies to Strengthen the Economy in 2012 and Beyond7. Concluding Remarks 3
  4. 4. 1. BACKGROUND AND INTRODUCTION TO THE ROAD MAP A quiet peek into history is always useful… 4
  5. 5. SRI LANKA INTRODUCED OPEN ECONOMIC POLICIES FROM 1978… • Adoption of more market oriented policies promoting greater private sector participation in economic activity • De-regulation of interest rates • Relaxation of exchange controls • Removal of price controls • Elimination of quantitative restrictions on imports • Foreign banks permitted to open branches in the country • Establishment of new domestic private banks • Adoption of export market oriented industrial policy • Promotion of private sector and foreign investments 5
  6. 6. FURTHER RELAXATION OF POLICY MEASURES TOOK PLACEFROM 1990 TO 2005…• Extensive privatisation programme• Medium term budget deficit reduction programme• Liberalisation of current account transactions in 1994• Gradual liberalisation of capital account, commencing 1997• Independently floating exchange rate policy, commencing 2001• Export oriented industrialisation policy further strengthened• Tax reforms and incentives to encourage private sector investments 6
  7. 7. FROM 2006 ONWARDS, POLICY MEASURES WERE BASEDON THE MAHINDA CHINTANA…• Transforming the country into an • Fiscal consolidation and prudent debt economic hub in the region management• “Inclusive growth” policy and many • Foreign investment policy directed towards incentives to promote the SME sector attracting large scale strategic investments and Local entrepreneurship • Emphasis on export of high value added• Balanced Regional Development promotion manufactured products• Emphasis on the development of the • Export oriented industrialisation Northern and Eastern Provinces policy further strengthened• Strong focus on Food Security • Monetary Policy and Exchange Rate Policy implemented to facilitate stability• Address infrastructure bottlenecks by implementing a mega infrastructure • Expansion of domestic banking activities to development drive regional areas including the North and East• Relaxation of exchange control regulations • Strengthen the banking sector and capital to address the Savings and Investment gap market• Tax reforms and incentives to encourage private sector investments 7
  8. 8. MAHINDA CHINTANA: VISION FOR THE FUTURE ENVISAGES THETRANSFORMATION OF SRI LANKA INTO AN ECONOMIC HUB IN SOUTHASIA AND DOUBLING OF PER CAPITA INCOME TO US$ 4,000 BY 2016… Aviation Hub  Second international airport at Mattala  Modernisation of the Bandaranaike International Airport (BIA) Maritime Hub and building of second runway at the BIA Colombo Port – Container mega hub  Development and upgrading of domestic airports Commercial Hub Hambantota Port – Free port-service,  Position Colombo as a regional logistics and  Establish Sri Lanka as the industrial and multi-purpose services hub and as a hub for budget airlines foremost centre in the region in the provision of commercial services, Galle Port – Cruise shipping centre International banking and Trincomalee – Port-related industries international investments  With growth of ports and tourism, Sri Lanka’s Oluvil Port – Commercial and fisheries South Asian commercial sector will develop naturally Kankasanthurei & Point Pedro – Regional ports Economic Hub Energy Hub  Develop renewable Knowledge Hub energy sources  Target IT literacy and internet access for all  New oil refinery at Hambantota  Creation of knowledge-based jobs  Oil exploration and production – 3 sea basins (offshore)  Commence degree programmes have been identified directly targeting foreign students (Mannar, Cauvery, Southern Waters)  Accredited foreign universities to set up university  Develop oil trade-related ancilliary services colleges in Sri Lanka including gas 8
  9. 9. 2. KEY MACROECONOMIC DEVELOPMENTS IN 2011Since the start of the global crisis in 2007, each year seems tobe more challenging than the previous one…“The world has moved from a troubled multi-speed recovery … to anew and more dangerous phase.” Robert Zoellick - President, World Bank“During the past year, the Central Bank of SriLanka took courageous decisions that werebased on its core objectives. The Bank tookadvantage of the structural changes that wereemerging in the economy. It also made thenecessary interventions to fashion the country’seconomic journey on a “fast track” basis” 9
  10. 10. THE PROTRACTED EUROZONE DEBT CRISIS AND LOSS OFCONFIDENCE HAS SLOWED THE GLOBAL RECOVERY… % GDP Growth estimates (%) 8• Estimates of World Economic 6 growth 4  World economy: 2 2010: 5.1% 0 2009 2010 2011 2012 2013 2014 2015 2016 2011: 4.0% -2 2012: 4.0% -4  Advanced economies: -6 World Advanced economies Emerging and developing economies 2010: 3.1% 2011: 1.6% 16 GDP Growth of Selected countries (2010-2011) 2012: 1.9% 14 12  Emerging & developing 10 Per cent economies: 8 6 2010: 7.3% 4 2 2010 2011: 6.4% 0 2011 -2 2012: 6.1% France Bangladesh Japan India Canada Germany United States Australia China Pakistan Spain Thailand Korea Malaysia Sri Lanka Singapore United Kingdom Source : IMF, WEO Database, Sep 2011 10
  11. 11. THE BELIEF THAT THE WORLD ECONOMIC GROWTH WOULDCONTINUE TO BE SLUGGISH IN 2012 IS GAINING GROUND…• The Central Bank’s own projections and policy propositions have been based on assumptions and judgments, which would need to be modified in line with emerging developments in the global as well as Sri Lankan economy.• Naturally therefore, any deviations in trends in the economy would be watched even more closely, and policies and strategies altered, going forward… 11
  12. 12. NEVERTHELESS, ASIA’S IMPORTANCE IN THEGLOBAL ECONOMY HAS BEEN STEADILY RISING… Asia’s Share of Global GDP, 1700-2050 Source: Asia 2050 – Realising the Asia Century, ADB 2011 12
  13. 13. IN THIS SCENARIO, THE SRI LANKAN ECONOMY HAS ACHIEVEDA HIGH GROWTH PATH…• The growth in 2011 is estimated at 8.3% • Sovereign Credit Ratings, Doing Business Index, FDI, etc. on the rise• First time in history to record over 8% growth in two consecutive years • Continuation of fiscal consolidation process• GDP ESTIMATED TO EXCEED US$ 59 BILLION & GDP PER CAPITA TO REACH US$ 2,830 • Lowest unemployment rate of 4.3%• Inflation steadied at mid-single digit level • Significant reduction in poverty• Comparatively low interest rate environment Real GDP Growth• Savings and investments on a steady growth 9 7.7 8.0 8.3 8 path 6.8 7 6.0• External trade on a buoyant path 6 Per cent 5• Foreign reserves preserved at a comfortable 4 3.5 level 3 2• Stable exchange rate 1 0• Some pressure on BOP was observed 2006 2007 2008 2009 2010 2011 Est 13
  14. 14. THE SERVICES SECTOR CONTRIBUTION TO THE GROWTH WASSIGNIFICANT… Services Sector and GDP GrowthServices sector estimated to grow by 8.6% in 2011 10• Services sector growth was 8.7% for the first 8 three quarters of 2011 6• Healthy growth in consumer demand for Per cent 4 services with increasing real income level in the country 2• Wholesale and retail trade, port operations, 0 2007 2008 2009 2010 2011 Proj. cargo and container handling, post and Services GDP telecommunication, banking, insurance and Performance of the Ports real estate continued to expand 66 4,500• Transport and communication grew with 62 58 4,000 gradual integration of Northern and Eastern 54 3,500 Metric Tonnes mn. 50 Provinces with the rest of the economy TEUs 000 46 3,000 42 38 2,500• Services estimated to 34 30 2,000 contribute about US$ 34 billion 2006 2007 2008 2009 2010 2011 to the GDP (58%) Cargo Handling (Proj.) Container Throughput (Right Axis) 14
  15. 15. THE INDUSTRY SECTOR RECORDED THE HIGHEST SECTORALGROWTH…Industry sector estimated to grow by 10.1% in 2011 Industry Sector Quarterly Growth Rates (2009-2011)• Industry sector growth was 10.5 % during the 12.0 first three quarters of 2011 10.0 Growth Rate (%)• Increased demand from both domestic and 8.0 external sectors 6.0 4.0• Manufacturing, mining and quarrying, 2.0 electricity, gas and water and construction 0.0 sub-sectors recorded higher growth rates Quarter 1 Quarter 2 Quarter 3 Quarter 4• Factory industry grew by 8.4 % during the first 2009 2010 2011 Est three quarters of 2011 mainly due to export Factory Industry Quarterly Growth Rates (2009-2011) market oriented industries, despite global 10.0 economic slowdown 8.0 Growth Rate (%)• Food, beverages and Tobacco industries 6.0 performed exceptionally well 4.0 2.0• Industries estimated to contribute about 0.0 US$ 18 billion to the GDP (30%) Quarter 1 Quarter 2 Quarter 3 Quarter 4 2009 2010 2011 Est 15
  16. 16. THE AGRICULTURE SECTOR GROWTH WAS AFFECTED, BUTRECOVERED…Agriculture sector is estimated to grow by 2.0% in 2011 5,000 Paddy Production• Sector contracted by 1.8% in the first half 4,500 of 2011 due to adverse weather 4,000 3,500 Production mt. 3,000• Fertilizer support programme and high 2,500 prices in first half of 2011 helped 2,000 1,500 production of export agriculture 1,000 500• Rubber production and prices remained - 2006 2007 2008 2009 2010 2011 2012 strong Proj. Production of Tea, Rubber and Fish• Coconut production recovered• Fish production for Jan-Oct 2011 recorded an increase of 15.5%• Agriculture estimated to contribute about US$ 7 billion to the GDP (12%) 16
  17. 17. UNEMPLOYMENT DECLINED WHILE LABOUR PRODUCTIVITY INCREASED…. Unemployment Rate (%) • Unemployment rate declined to 4.3% in first 8.00 half of 2011 7.00 6.5 6.0 – Continued employment generation was due 6.00 5.2 5.7 4.9 to reconstruction, infrastructure development 5.00 4.3 and expansion of economic activities 4.00 – Increase in share of employment in micro 3.00 entrepreneurship category 2.00 1.00 – Sharp drop in unemployment among the age 0.00 group of 15-24 years 2006 2007 2008 2009 2010 2011 H1 • Overall labour productivity, measured by GDP per worker, is continuing to improve Unemployment Rates of Advanced and Some – Industry and Service sectors recorded growth in Emerging Economies - 2011 Est. productivity 20.7 22 500 Labour Productivity by Sector 450 16.5 17 400 Per centRs. 000 per person 350 12 300 9.5 9.1 7.6 7.4 7.8 250 6.7 6.0 6.8 6.46.2 200 7 5.0 4.9 4.0 4.3 3.33.2 3.4 150 2.3 100 2 50 France Malaysia Australia China Japan Switzerland Czech Rep. Greece Indonesia New Zealand Sweden Korea Spain Singapore Sri Lanka UK Canada Germany USA Pakistan 0 -3 2005 2006 2007 2008 2009 2010 2011 Overall Agriculture Industry Services 17
  18. 18. AT THE SAME TIME, POVERTY ALLEVIATION HAS BEEN GIVEN SERIOUS ATTENTION... Poverty Headcount Index Poverty HCI 35 (% of population) Sector 2006/07 2009/2010 30 28.8 25 22.7 Sri Lanka 15.2 8.9per cent 20 15.2 15 Urban 6.7 5.3 8.9 10 Rural 15.7 9.4 5 0 Estate 32.0 11.4 1995/1996 2002 2006/2007 2009/2010 Source : Department of Census and Statistics Source : Department of Census and Statistics 18
  19. 19. THE EXTERNAL SECTOR DISPLAYED STRONG PERFORMANCEAMIDST THE SLOW PACE RECOVERY IN THE WORLD ECONOMY…• External trade in 2011 remained strong where both exports and imports expanded recording 51.6% of GDP, up from 44.4% in 2010• Tourism on an accelerator (1.4% of GDP)• International investor confidence at high levels• Expatriate workers’ remittances continued to be the foremost foreign exchange earner, recording 8.8% of GDP, up from 8.3% in 2010• Consolidation of ‘Middle-Income Emerging Market Country’ status 19
  20. 20. A SIGNIFICANT INCREASE IN EXPORT EARNINGS WAS RECORDED DESPITE SLOWER GROWTH IN TRADITIONAL MARKETS…• Export earnings increased by over 23% with 1,000 Earnings from Exports continuous growth in exports to the EU and the 900 USA 800• Export diversification in terms of markets and USD mn. 700 products 600• Value addition was more price competitive 500• Exports as a percentage of GDP: 17.7% 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 2010 2011 Exports of Garments to the EU Exports of Garments to the USA 220 160 2009 2010 2011 2009 2010 2011 200 150 140 180 130 USD mn. USD mn. 160 120 140 110 120 100 90 100 80 80 70 60 60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 20
  21. 21. AT THE SAME TIME, IMPORTS EXPANDED AT AN EVEN FASTERPACE…• For the first 10 months of 2011, imports Expenditure on Imports expanded by over 50%, y-o-y 2,000 – Investment goods imports increased by over 60% 1,800 – Intermediate goods imports increased by over 51% 1,600 – Consumer good imports increased by over 47 % 1,400 US$ mn. 1,200• The sharp rise in investment goods imports 1,000 was due to expanding infrastructure 800 development projects 600• The bulk of the expenditure on intermediate 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec good imports was on account of petroleum imports with increases in both volume and 2009 2010 2011 price• Consumer goods were driven by motor vehicle imports and non-essential goods: Higher demand due to increased real incomes• Imports as a percentage of GDP: 33.9% 21
  22. 22. IN PARTICULAR, PETROLEUM, MOTOR VEHICLES AND GOLDIMPORTS SURGED IN 2011… Imports (US$ mn) Growth Share of Category 2010 2011 Est. Rate (%) imports (%) 1. Consumer goods 2,870 4,137 44 20.7 Food and drink 1,642 2,108 28 10.5 Other consumer goods 1,228 2,029 65 10.1 Motor Cars, Cycles, Electrical Appl. 632 1,121 77 5.6 Other 596 908 52 4.5 2. Intermediate goods 7,496 11,234 50 56.1 Petroleum 3,019 4,505 49 22.5 Textiles and clothing 1,732 2,223 28 11.1 Other intermediate goods 2,745 4,056 64 22.5 Gold 82 600 632 3.0 3. Investment goods 2,909 4,550 56 22.7 Machinery and equipment 1,206 1,975 64 9.9 Transport equipment 582 990 70 4.9 Building materials 810 1,124 39 5.6 Other investment goods 312 461 48 2.3 Total Imports 13,451 20,021 49 100.0 22
  23. 23. TOURISM ENTERED A HIGH GROWTH ERA…• Tourist arrivals poised to record 850,000 Tourist Arrivals 100 80 for 2011. Tourist arrivals 758,458 for Jan- 90 Nov 2011, an increase of 33% y-o-y No. of Tourist Arrivals 000 60 80 Year-on-year % change 70• Earnings from tourism increased by 47% 60 40 to US$ 736 million & average spending 50 20 per tourist per night increased to US$ 97 40 0 30 from US$ 88 in 2010 20 -20• Western Europe (37%), India (20%), East 10 0 -40 Asia (11%) and Middle East (7%) Nov-09 Nov-10 Nov-11 Sep-09 Sep-10 Sep-11 Jan-09 Jan-10 Jan-11 May-09 May-10 May-11 Mar-09 Mar-10 Mar-11 Jul-09 Jul-10 Jul-11• As of November 2011, 197 hotel projects No. of Tourist Arrivals Growth (%) for 12,579 rooms are in the pipeline• Tourism as a percentage of GDP: 1.4% 23
  24. 24. SEVERAL ADDITIONS TO TOURISM INDUSTRY ARE EXPECTED TO TAKE THE INDUSTRY TO THE NEXT LEVEL….• More International Hotel Chains - Shangri-La, Sheraton, Hyatt, Sun City• 11 new airlines have registered since 2010 New air lines start after conflict ended in Sri Lanka 1.Gulf Air 5.China Eastern 9. Aerosvit Airlines 2.Oman Air 6. Finnair 10. Hainan Airlines 11. PIA – Pakistan 3. Flydubai 7. Nova Airways International Airlines 4. SpiceJet 8. Aeroflot• SriLankan Air Taxis now operate to 14 popular domestic tourist destinations• “Mirissa” has now established itself as the world’s top spot for watching Blue Whales…• The East coast and the Southern coastline are becoming major attractions for surfers and windsurfers• New Shipping lines − Top 20 shipping lines, which contribute to 80% of international trade, use the Colombo Port 24
  25. 25. WORKERS’ REMITTANCES EMERGED AS THE FOREMOST FOREIGN EXCHANGE EARNER INDICATING A MAJOR SHIFT IN SRI LANKA’S EXTERNAL SECTOR… Workers’ Remittances • Workers’ remittances estimated to be 5500 5,231 around US$ 5.2 billion in 2011, up by 5000 27% from previous year 4500 4000 4,116 – As a percentage of GDP: 8.8% – As a percentage of total externalUS$ mn. 3500 3,330 2,918 3000 2,502 receipts: 18% 2500 1,919 2,161 Results mainly due to… 2000 • Attention to skilled labour migration 1500 1000 • Negotiations to increase average 2005 2006 2007 2008 2009 2010 2011 Est. wages and working conditions • Improved arrangements to channel remittances through banking sources • Positive sentiment on domestic environment • Diversification in terms of employment destinations 25
  26. 26. WORKERS’ REMITTANCES AND INFLOWS TO THE SERVICESACCOUNT SERVED TO CONTAIN THE WIDENED TRADE DEFICIT… • Deficit in trade account is now Workers remittances and inflows to the Services a/c offset by: 6 5 − Higher inflows of workers’ remittances 4 USD bn. 3 − Surplus in the services account 2 • Inflows on account of emerging 1 services – transportation, computer and information, 0 2005 2006 2007 2008 2009 2010 2011 Est BPOs, insurance, and business Workers Remittances Inflows to the Services A/C services, also increasing THIS NEW TREND SUGGESTS THAT NEW OPPORTUNITIES ARE AVAILABLE IN THIS REGARD IN THE FUTURE… 26
  27. 27. FOREIGN CAPITAL INFLOWS CONTINUED TO BE SIGNIFICANT& PICKED UP MOMENTUM…• Fourth international sovereign bond in July 2011 was oversubscribed by 7.5 times• FDI exceeded US$ 1,000 million for the first time in history• Limit on foreign investment in Sri Lanka rupee denominated government securities relaxed from 10% to 12.5%• Further impetus provided to external financing by relaxation of private sector external financing• Gross official reserves being equivalent to cover about 4 months of imports• Exchange rate remained competitive and stable in a highly volatile external environment 27
  28. 28. THE FOURTH SOVEREIGN BOND ISSUE CLEARLY RESONATED WITH INVESTORS…• The 10 year bond of US$ 1 bn was oversubscribed Investor Mix of 2011 Sovereign Bond Issue by over 7.5 times• Issue attracted highly diverse investor interest Europe 30%• ‘Best Sri Lanka Deal’ awarded for the US$1 billion 10-year sovereign bond by Finance Asia, for the second consecutive year• Highly competitive yield United States Asia 27% 43% Harmonised long-term interest rates (% p.a) (Period averages; secondary market yields of government bonds with maturities of close to ten years) Euro area Jul-11 Nov-11 Greece 16.2 17.9 Sovereign Bond Issues - Amount & Coupon Rate (%) Ireland 12.4 8.5 Portugal 12.2 11.9 Spain 5.8 6.2 Italy 5.5 7.1 Belgium 4.2 4.8 France 3.4 3.4 Austria 3.4 3.4 Netherlands 3.2 2.4 Finland 3.2 2.5 Germany 2.7 1.9 Sources: ECB and European Commission Jul-11 Nov-11 28 Sri Lanka 5.7 6.2
  29. 29. AS A RESULT, GROSS OFFICIAL RESERVES REMAINED ATCOMFORTABLE LEVELS, ALTHOUGH LOWER THAN AT THEBEGINNING OF THE YEAR…• Gross Official Reserves amounted to US$ 6.0 billion by end 2011 compared to US$ 6.6 bn by end 2010. Gross Official Reserves (Without ACU balances) and Months of Imports 7.0 9.0 8.0 6.0 7.0 5.0 6.0 US$ bn. 4.0 5.0 Months of Imports 3.0 4.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 Feb-09 Feb-10 Feb-11 Jan-09 Jun-09 Jul-09 Jan-10 Jun-10 Jul-10 Jan-11 Jun-11 Jul-11 Mar-09 Mar-10 Mar-11 Nov-09 Dec-09 Nov-10 Dec-10 Nov-11 Dec-11 May-09 Aug-09 Sep-09 Oct-09 May-10 Aug-10 Sep-10 Oct-10 May-11 Aug-11 Sep-11 Oct-11 Apr-09 Apr-10 Apr-11 Gross Official Reserves (Right Axis) Months of Imports (Left Axis) 29
  30. 30. DURING 2011, INTERNATIONAL RESERVES WERE ACCUMULATEDTO HISTORICALLY HIGH LEVELS, AND ALLOWED TO DECLINETOWARDS THE END OF THE YEAR…• Foreign reserves, stood at US$ 6.6 billion on 30 December 2010 and increased to a record high level of US$ 8.2 billion by mid August 2011, due to large-scale absorption of foreign exchange by the Central Bank• Thereafter, there was a draw down of reserves, mainly due to significant supply of foreign exchange to the market by the Central Bank• Yet, The current level of reserves is well above the level needed to: – Maintain confidence in the policies for monetary and exchange rate management including the capacity to intervene – Limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when private access to borrowing is slow – Assist the government in meeting its foreign exchange needs and external debt obligations• The current reserve level is also higher than the reserves level contemplated of 3.5 months imports equivalent, which was envisaged at the time of entering into the Stand-by Arrangement with the IMF 30
  31. 31. THE CENTRAL BANK HAS BEEN CONFIDENT OF ITS STANCE INTHE SECOND HALF OF 2011, SINCE SUBSTANTIAL FOREIGNEXCHANGE INFLOWS ARE EXPECTED IN 2012…• Expected inflows in 2012 are well over US$ 25 billion:  Exports: US$ 12.5 bn Major Corporates’ capital from abroad: US$ 500 mn  Tourism: US$ 1.2 bn (1.8% of GDP) Special long term financing expected for  Expat Workers’ remittances: US$ 6.5 bn Petroleum: US$ 1.0 bn (9.8% of GDP) Long-term currency swaps: US$ 500 mn  Foreign Direct Investments: US$ 2.0 bn (2.9% of GDP) Net Stock Market inflows: US$ 500 mn  Commercial Banks’ Tier II capital: US$ 1 bn Net Treasury Bill & Bond inflows: US$ 500 mn 31
  32. 32. AS A RESULT OF THE CENTRAL BANK POLICIES, THE EXCHANGE RATE IN 2011 DID NOT SUFFER UNNECESSARY VOLATILITY... • The Central Bank absorbed and supplied foreign currency to avoid excessive volatility in the domestic foreign exchange market and to maintain stability. • The Central Bank also accommodated the high growth driven demand for the increased import of intermediate and investment goods. • Overall, the Rupee depreciated against the US dollar by 2.6% in 2011 Daily Sri Lanka Rupee/US Dollar Daily Sri Lanka Rupee/Sterling Daily Sri Lanka Rupee/EURO Exchange Rate Movements Pound Exchange Rate Movements Exchange Rate Movements 200 180 121 195 175 119 190 170 185 165 117 180 160 Rs./GBPRs./USD Rs./EURO 175 155 115 170 150 113 165 145 160 140 111 155 135 109 150 130 Jul-09 Jul-10 Jul-11 Jan-09 Jan-10 Jan-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Jul-09 Jul-10 Jul-11 Jan-09 Jan-10 Jan-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Jul-09 Jul-10 Jul-11 Jan-09 Jan-10 Jan-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 32
  33. 33. AT THE SAME TIME, THE FISCAL CONSOLIDATION EFFORT CONTINUED, WHILE MAINTAINING PUBLIC INVESTMENT AT HIGH LEVELS… Overall Fiscal Deficit (as a % of GDP) 2011 Rev 2004 2005 2006 2007 2008 2009 2010 Est• The overall fiscal deficit is 0 estimated to be below 7% of GDP -2 in 2011, down from 8% in 2010, -4 Per cent mainly due to expenditure -6 containment policies -8 (7.5) (7.0) (7.0) (6.9) (7.0) (7.0) (8.0)• Such consolidation is expected to -10 (9.9) -12 be achieved, even while 8 Public Investment (as a percentage of GDP) 6.8 maintaining public investment at 7 6.3 6.3 6.4 6.0 6.4 6.0 6% of GDP in 2011 6 4.8 5 Per cent 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 Rev Est 33
  34. 34. LEADING TO THE DEBT TO GDP RATIO ESTIMATED TO FALL TO 78% IN 2011, WHILE IN MANY COUNTRIES THIS RATIO HAS SOARED… Selected Countries’ Debt to GDP ratios - 2010 250 220.0 200 142.8 Sri Lanka Per cent 150 119.0 Outstanding Government Debt (as a % of GDP) 100 82.3 84.0 94.9 92.9 96.3 81.9 75.5 94.4 90 60.1 50 88 87.9 86.2 0 86 Greece USA Portugal Italy France Sri Lanka Japan Singapore Spain Germany UK Ireland 85.0 84 81.9 Estimates for 2011Per cent 82 81.4 250 233.1 80 200 78.2 165.6 78 150 121.1 Per cent 76 109.3 106.0 93.5 100.0 100 86.8 82.6 78.2 80.8 67.4 74 50 72 2006 2007 2008 2009 2010 2011 Est. 0 Greece France Italy Japan USA Ireland Spain Singapore UK Germany Portugal Sri Lanka Source: IMF WEO September 2011 & MOFP 34
  35. 35. THE RISK INDICATORS OF SRI LANKAN PUBLIC DEBT IMPROVED,IN A TIME WHERE GLOBAL RISK HAS BEEN RISING… Less Moderately Highly Sri LankaIndicator Indebted Indebted Indebted 2011Disbursed External Debt Outstanding/Gross <30% >30% and <50% >50% 36.0%National IncomeDisbursed External Debt Outstanding/Exports <165% >165% and <275% >275% 155.6%of Goods and Non Factor ServicesTotal External Debt Service Payments/Exports <18% >18% and <30% >30% 9.1%of Goods and Non-Factor ServicesExternal Interest Payments/Exports of Goods <12% >12% and <20% >20% 2.9%and Non-Factor ServicesNet Present Value/Gross National Income <48% >48% and <80% >80% 36.9% *Net Present Value/Exports of Goods and Non- <132% >132% and <220% >220% 119.7% *Factor Services* Data for 2010 Source: Manual on Effective Debt Management, UN-ESCAP, 2006. 35
  36. 36. THE CONTINUOUS UPGRADE IN INFRASTRUCTURE GREATLYENHANCED THE COUNTRY’S PRODUCTIVE CAPACITY…– Road development projects • The Southern Highway Project, (Stage 1 : completed and Phase 2 in progress) • The Colombo - Katunayake Expressway (Completion by 2013) • The Colombo Outer Circular Road Project (Completion by 2013)– Power projects • Upper Kothmale Hydro Power Plant will be commissioned shortly • Norochcholai Coal Power Plant (Phase 1 : Completed, Phase 2 in progress) • Uma Oya Hydro Power Project (Completion by 2014) • Moragahakanda and Kaluganga Reservoir Projects (In progress) • Sampur Coal Power Project will be commissioned by 2017– Port development projects • The South Colombo Harbour Project, (Phase 1 Completion by 2013) • The Hambantota Port Development Project (Phase 1 : Completed) • The Oluvil Port Development Project (Completion by 2012) • The Galle Port (In progress) • The Kankasanthurei Port (In progress)– Several mega hotel projects, condominiums, shopping malls, development of North and East, and water supply projects– On-going rural infrastructure development projects • Gama Neguma, Maga Neguma, Small Irrigation Projects, Kirigammana projects, etc.– Lighting Sri Lanka (Targeted 100% electricity coverage by 2013) 36
  37. 37. ON THE BACK OF SUCH INFRASTRUCTURE UPGRADE, PRIVATE SECTOR INVESTMENTS HAVE BEEN ON THE RISE…• New terminal at Colombo South Port: • 197 Hotel projects and other Tourism US$ 500 mn project - just commenced related projects• Petroleum exploration in the Mannar – Shangri-La, Sheraton, Hyatt and Sun basin in progress City• New industries at Hambantota Port • Universities/Hospitals – 4 new industries have received Cabinet – Expansion of local universities and approval private education opportunities • Sugar Refinery plant • ICT, BPO projects, Hambantota Sports • Cement binding and bagging plant City • Fertilizer complex • Fisheries: deep sea fishing, cold • Petrochemical plant stores – Many more industries in the pipeline: Warehousing, Vehicle Assembly, etc. 37
  38. 38. THE CENTRAL BANK’S MONETARY POLICY STANCE IN 2011, WAS CAUTIOUS AND CONSISTENT, & DELIVERED STABILITY… % Policy Interest Rates of the Central Bank and the Average Weighted Call Money Rate• Policy interest rates in 2011 18 17.00 16.50 remained unchanged after one 14 14.75 13.00 downward adjustment in January 11.75 10.25 11.50 11.00 10.50 10 2011 9.00 8.50 9.75 8.00 7.50 9.50 7.25 9.00 8.50 7.00 6 Feb-09 Feb-10 Feb-11 Mar-09 Jun-09 Jul-09 Jan-10 Mar-10 Jun-10 Jul-10 Jan-11 Mar-11 Jun-11 Dec-08 Oct-09 Nov-09 Dec-09 Oct-10 Dec-10 Oct-11 Nov-11 Dec-11 May-09 Sep-09 May-10 Aug-10 Sep-10 May-11 Aug-11 Sep-11 Apr-09 Apr-11• Weighted average call money rate continued to remain largely stable AWCMR Repo Reverse Repo Penal Rate within the policy rate corridor Deposit Rates of Commercial Banks, 25 Treasury bill yield and Monthly AWPR• Market interest rates remained 20 broadly stable. 15 Per cent• Slight increase in rates witnessed 10 towards end of 2011 5 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Jan-07 May-07 Jan-08 May-08 Jan-09 May-09 Jan-10 May-10 Jan-11 May-11 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Average Weighted Prime Lending Rate - AWPR (Monthly) Average Weighted Deposit Rate - AWDR Average Weighted Fixed Deposit Rate - AWFDR Primary Market Yield on 91-day Treasury bills 38

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